SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _______________
Commission File Number 1-12902
FRONTIER ADJUSTERS OF AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
----------------------------------------
(Address of principal executive offices)
(602) 264-1061
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding on May 10, 2000 8,957,660
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000 June 30, 1999
-------------- -------------
(unaudited) (*)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,159,691 $ 6,892,851
Receivables 1,061,968 1,603,756
Prepaid expenses 171,593 344,041
Other 278,336 298,214
----------- ------------
TOTAL CURRENT ASSETS 3,671,588 9,138,862
----------- ------------
PROPERTY AND EQUIPMENT 2,636,609 2,540,219
Less accumulated depreciation
and amortization (1,003,541) (931,283)
----------- ------------
1,633,068 1,608,936
----------- ------------
OTHER ASSETS
Cost of subsidiary in excess of
net tangible assets acquired 213,817 213,817
Less accumulated amortization (183,173) (181,440)
----------- ------------
30,644 32,377
Receivables (long-term) 310,000 350,000
Investments (long-term) 635,466 685,148
Other 245,093 303,661
----------- ------------
1,221,203 1,371,186
----------- ------------
TOTAL ASSETS $ 6,525,859 $ 12,118,984
=========== ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 28,787 $ 28,005
Accrued expenses 179,774 404,325
Franchisee/licensee remittance payable 131,560 552,946
Service fees due to UFAC 120,000 50,000
Distribution payable -- 5,918,475
Other 136,798 111,600
----------- ------------
TOTAL CURRENT LIABILITIES 596,919 7,065,351
----------- ------------
STOCKHOLDERS' EQUITY
Common stock 90,191 90,191
Additional paid in capital 2,104,413 2,104,426
Treasury stock (184,068) (184,368)
Other 24,776 20,653
Retained earnings 3,893,628 3,022,731
----------- ------------
5,928,940 5,053,633
----------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,525,859 $ 12,118,984
=========== ============
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
2
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Continuing licensee and franchisee fees $3,842,175 $3,670,645 $1,256,489 $1,212,145
Adjusting fees 882,979 1,059,009 225,609 360,027
---------- ---------- ---------- ----------
4,725,154 4,729,654 1,482,098 1,572,172
---------- ---------- ---------- ----------
COST AND EXPENSES
Compensation and employee benefits 1,682,283 2,108,759 396,282 690,975
Office 306,702 316,169 89,176 120,134
Advertising and promotion 117,312 207,497 51,505 98,707
Depreciation and amortization 166,168 198,064 51,217 70,577
Provision for doubtful accounts 227,203 152,845 91,365 56,845
Services performed by UFAC 270,000 -- 120,000 --
Other 644,950 778,003 214,809 222,361
---------- ---------- ---------- ----------
3,414,618 3,761,337 1,014,354 1,259,599
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 1,310,536 968,317 467,744 312,573
---------- ---------- ---------- ----------
OTHER INCOME
Interest income 94,346 86,848 37,973 29,573
Other (Net) 33,727 12,138 3,706 5,805
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 128,073 98,986 41,679 35,378
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,438,609 1,067,303 509,423 347,951
INCOME TAXES 567,712 423,672 204,926 139,735
---------- ---------- ---------- ----------
NET INCOME $ 870,897 $ 643,631 $ 304,497 $ 208,216
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ .10 $ .14 $ .03 $ .05
========== ========== ========== ==========
Diluted $ .10 $ .14 $ .03 $ .05
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,957,561 4,605,358 8,957,564 4,605,358
========== ========== ========== ==========
Diluted 8,957,561 4,606,776 8,957,564 4,605,784
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME $870,897 $643,631 $304,497 $208,216
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment 4,123 -- 350 --
Unrealized gain (loss) on securities -- 3,406 -- 3,222
-------- -------- -------- --------
4,123 3,406 350 3,222
-------- -------- -------- --------
COMPREHENSIVE INCOME $875,020 $647,037 $304,847 $211,438
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
NET INCOME $ 870,897 $ 643,631
----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Operations 166,168 198,064
Other -- 546
(Gain) on sale of investments (13,494) --
Loss on disposition of property and equipment 5,340 3,640
(Gain) on sale of license (267) --
Allowance for doubtful accounts 227,203 152,845
Change in assets and liabilities:
(Increase) decrease in:
Receivables 91,411 (80,127)
Prepaid expenses 172,448 60,254
Other 962 70,532
Increase (decrease) in:
Accounts payable 782 10,388
Accrued expenses (224,551) (106,921)
Franchisee and licensee remittance payable (421,386) 92,457
Service fees due to UFAC 70,000 --
Other 22,509 20,907
----------- -----------
Total adjustments 97,125 422,585
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 968,022 1,066,216
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (140,943) (132,749)
Investments purchased -- (2,970,329)
Proceeds on sale of fixed assets 1,209 26,761
Proceeds from sales of investments 63,494 3,000,000
Proceeds from sale of intangible assets 267,629 --
License acquisition -- (150,000)
Payments on license acquisition (13,615) (33,462)
Advances to licensees and franchisees (2,837,412) (3,180,151)
Collections of advances to licensees and franchisees 2,869,832 3,253,774
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 210,194 (186,156)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (5,918,475) (172,701)
Proceeds from sales of stock 287 --
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (5,918,188) (172,701)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,812 --
----------- -----------
NET INCREASE (DECREASE) IN CASH (4,733,160) 707,359
Cash at beginning of the period 6,892,851 929,364
----------- -----------
Cash at the end of the period $ 2,159,691 $ 1,636,723
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period
Income taxes $ 569,903 $ 313,215
Interest $ 1,127 $ 1,538
</TABLE>
The accompanying notes are an integral part of these condensed statements.
5
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of operations for the interim periods.
The results of operations for the three and nine month periods ended March
31, 2000 are not necessarily indicative of the results to be expected for
the full year.
(2) REPORTABLE SEGMENTS
Financial information with respect to the Company's reportable segments for
the nine and three months ended March 31, 2000 and 1999 is as follows:
Nine months ended Las Vegas/Henderson Corporate and
March 31, 2000 and Tucson Offices Phoenix Office Consolidated
- -------------- ------------------ -------------- ------------
Revenue $ 323,441 $4,401,713 $4,725,154
Depreciation and Amortization 25,977 140,191 166,168
Interest Income -- 94,346 94,346
Segment Net Income (Loss) (2,911) 873,808 870,897
Expenditures for Segment Assets -- 140,943 140,943
Segment Assets $ 95,815 $6,412,336 $6,508,151
Nine months ended
March 31, 1999
- --------------
Revenue $ 323,072 $4,406,582 $4,729,654
Depreciation and Amortization 25,698 172,366 198,064
Interest Income -- 86,848 86,848
Segment Net Income 8,756 634,875 643,631
Expenditures for Assets 18,545 114,204 132,749
Segment Assets $ 147,487 $8,113,160 $8,260,647
Three months ended
March 31, 2000
- --------------
Revenue $ 76,302 $1,405,796 $1,482,098
Depreciation and Amortization 4,620 46,597 51,217
Interest Income -- 37,973 37,973
Segment Net Income (Loss) (8,543) 313,040 304,497
Expenditures for Segment Assets -- 23,830 23,830
6
<PAGE>
Three months ended Las Vegas/Henderson Corporate and
March 31, 1999 and Tucson Offices Phoenix Office Consolidated
- -------------- ------------------ -------------- ------------
Revenue $ 93,531 $1,478,641 $1,572,172
Depreciation and Amortization 4,909 65,668 70,577
Interest Income -- 29,573 29,573
Segment Net Income 15,515 192,701 208,216
Expenditures for Assets -- 15,558 15,558
On January 1, 2000, the Company sold its Tucson, Arizona location to a new
franchisee. Revenue and expenses from the Tucson location for the three
months ended March 31, 2000, are the result of run-off business and will
continue to decline in the future.
(3) EARNINGS PER SHARE
The effect of 99,900 stock options is not included in the earnings per
share calculation because they are antidilutive.
(4) DEFERRED GAIN ON SALE OF FRANCHISES
On January 1, 2000, the Company sold its Tucson, Arizona office to a new
franchisee for $167,629 resulting in a deferred gain of $156,021. During
the three months ended March 31, 2000, the Company also sold three
franchises located in the Chicago, Illinois area for $25,000 per franchise
that resulted in an aggregate deferred gain of $75,000. The Company is
collecting the proceeds from these sales by deducting a specified
percentage of the franchisees' weekly remittances to be applied against the
sales price until paid in full. The deferred gains associated with these
sales are netted against the receivable for balance sheet presentation and
are recorded as a gain on sale of assets when received. On March 31, 2000,
the aggregate deferred gain netted against receivables was $230,754.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
"expectations", "anticipation", "hopes", "intentions", "beliefs", or
"strategies" regarding the future. Forward looking statements include statements
regarding revenue, margins, expenses, and earnings analysis with regard to the
Company or with regard to the Company's licensees and franchisees for the
remainder of fiscal 2000 and thereafter; improvement of, and growth in the
number of, licensees and franchisees; future spending on marketing and product
development strategy; statements regarding the outcome of litigation; the merger
transaction with United Financial Adjusting Company described below, and
liquidity and anticipated availability of cash for operations, acquisitions, or
payment of dividends. All forward looking statements included in this document
are based on information available to the Company on the date of this report,
and the Company assumes no obligation to update any such forward looking
statement. It is important to note that the Company's actual results could
differ materially from those in such forward looking statements. Among the
factors that could cause actual results to differ materially are the factors
discussed in this report and any other reports on file with the SEC, including
but not limited to the extent and nature of natural disasters in geographic
areas serviced by the Company or by its licensees and franchisees; management
decisions by insurance companies and self-insureds to increase or decrease the
degree to which they contract for services offered by the Company, its licensees
or franchisees; the Company's ability to identify and attract new qualified
licensees and franchisees; the success of the Company's promotional and
marketing programs; the Company's ability to successfully manage offices
reacquired from existing licensees and franchisees; and uninsured liability for
acts or omissions of the Company's employees, licensees, or franchisees.
7
<PAGE>
In March of 2000, the Company's board of directors agreed in principle to enter
into a transaction whereby the Company will exchange a net of approximately 11.5
million shares of its common stock for all of the issued and outstanding shares
of stock of United Financial Adjusting Company ("UFAC") and its subsidiaries, JW
Software, Inc. ("JW"), and DBG Technologies, Inc. ("DBG"). Upon consummation of
the proposed transaction, the Company will merge with UFAC and will become the
parent of JW and DBG. The merger will be accounted for similarly to a pooling of
interest since the entities are under common control, to the extent of the
common ownership. The assets and liabilities of these companies will be recorded
at their fair value to the extent of the ownership interest by minority
stockholders and at the historical cost for the ownership interest under common
control.
UFAC is an insurance claim management services company, JW develops and markets
claim management software, and DBG develops and markets internet-based systems
and web sites.
Netrex Holdings LLC ("Netrex") currently owns all of the outstanding shares of
stock in UFAC which holds approximately 59% of the Company's outstanding common
stock. Consequently, after the planned transaction is consummated, Netrex would
own approximately 16.4 million shares of the Company's stock, representing
approximately 82% of the Company's outstanding stock.
The proposed transaction is subject to, among other things, additional due
diligence by the parties and execution of mutually satisfactory agreements.
Assuming a definitive agreement is reached, the transaction will also be subject
to approval by the shareholders of the Company and UFAC and the necessary
regulatory and stock exchange approvals. In connection with this transaction,
the Company will change its name to "Netrex Business Services Inc.". The Company
will continue to operate the franchised and licensed claims adjusting business
under the Frontier name.
FINANCIAL CONDITION
The Company has historically financed its growth and on going operations with
cash generated from operations. In the nine months ended March 31, 2000, the
Company's operations generated $968,000 in cash.
During the nine months ended March 31, 2000, the most significant items
affecting cash generated by the Company's operations are net income of $871,000,
a $421,000 decrease in franchisee and licensee remittance payable, the $225,000
decrease in accrued expenses, and the provision for doubtful accounts of
$227,000. The Company, pursuant to agreements with its licensees and
franchisees, acts as a collection agent for all of its licensees and
franchisees. The Company remits to its licensees and franchisees the
collections, less the ongoing license/franchise fee and any amounts due the
Company, such as loan repayments and errors and omissions insurance premium. The
day of the week that the Company's fiscal period ends, therefore, can have a
significant effect on the reported amount that is due to the licensees and
franchisees. As March 31, 2000, fell one day after the collections were remitted
to licensees and franchisees, the Company's remittance payable was $132,000. In
comparison, the Company's financial statements as of June 30, 1999, reflect
collections for four days of $553,000. The decrease in accrued expenses results
from the payout of employee benefits and bonuses during the first quarter of
fiscal 2000. The increase in allowance for doubtful accounts is due to the aging
of larger balanced loans given to franchisees and licensees as compared to the
same period of the prior fiscal year.
The Company anticipates that during fiscal 2000 its operations will generate
sufficient cash to fund its operations and equipment acquisitions. Through its
capital investment program, the Company replaces obsolete or outdated equipment
and invests in new equipment and furnishings to maintain or increase the
productivity of the Company and its employees. The Company anticipates investing
between $200,000 to $300,000 in fiscal 2000 for equipment and furnishings
pursuant to its capital investment program.
In June 1999, a complaint was filed in the United States District Court in
Nebraska against multiple defendants including the Company. The complaint arises
from the alleged embezzlement by a former licensee in connection with claims
services provided for the benefit of the plaintiff. The complaint seeks damages
of at least $1,800,000 from the Company. As the lawsuit is still in its earliest
phase, the Company cannot yet assess the merits of the complaint or the effects
this litigation will have on the Company. For further discussion, see "Part II,
Item 1 - Legal Proceedings".
8
<PAGE>
The Company's ratio of current assets to current liabilities was 6.15 to 1 as of
March 31, 2000 and 1.29 to 1 as of June 30, 1999. The increase is primarily the
result of the decreases in dividend payable and franchisee/ licensee remittance
payable at March 31, 2000, as compared to June 30, 1999.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS
ENDED MARCH 31, 1999
REVENUE
The Company's revenue decreased $5,000 to $4,725,000 during the nine months
ended March 31, 2000 from $4,730,000 in the same period of the prior fiscal
year. This decrease represents a decrease of $176,000 in adjusting and risk
management fees and an increase of $171,000 in continuing licensee and
franchisee fees.
The decrease of $176,000 in adjusting and risk management fees from $1,059,000
in the nine months ended March 31, 1999 to $883,000 for the nine months ended
March 31, 2000 represents a 16.6% decrease. The company experienced an increase
of $17,000 in adjusting fees in its Las Vegas/Henderson office, and decreases of
$58,000 and $132,000 in adjusting fees from the Tucson and Phoenix offices,
respectively. The remainder of the decrease, $3,000, is due to the
discontinuation of risk management services provided by the Company's home
office.
The increase in the Las Vegas/Henderson office is primarily the result of an
increase in storms this fiscal year as compared to the same period of the prior
year. The decrease in the Phoenix office mainly relates to the loss of a client.
The decrease in the Tucson office is the result of the Company's sale of the
Tucson office to a new franchisee on January 1, 2000.
The Company's revenue from continuing licensee and franchisee fees increased
4.7% or $171,000 from $3,671,000 in the nine months ended March 31, 1999 to
$3,842,000 in the nine months ended March 31, 2000. This increase reflects the
benefit to the Company's licensees and franchisees from an increase in claims
assignments from insurance companies and self-insureds.
The Company's revenue is affected by numerous matters including the work loads
of other companies and claims presented by their clients. Therefore, the Company
is unable to project its future revenue. The Company has historically seen
growth in the licensee and franchisee fees paid. However, during fiscal 1998,
the Company experienced a decrease in revenue due primarily to the phase out of
a business relationship with its then major client. The Company has responded to
the loss of revenue by continuing to develop and implement sales marketing
efforts to take advantage of its geographic diversity as well as the unique
strengths of its individual licensees and franchisees. The Company's revenue did
recover in fiscal 1999, to an amount comparable to that of fiscal 1997, which
was prior to the loss of the client, and the Company hopes to see continued
growth in licensee and franchisee fees paid from other sources.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 49.3% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses decreased 20.2% or $427,000 from $2,109,000 in the nine months ended
March 31, 1999 to $1,682,000 in the current nine month period. The decrease is
the result of the retirement of William J. Rocke, former CEO and former Chairman
of the Board, and Jean E. Ryberg, former President, on June 30, 1999. Certain of
the services provided by Mr. Rocke and Mrs. Ryberg are now provided by UFAC
pursuant to a service agreement between the Company and UFAC. Charges for these
services are reflected in a monthly fee paid to UFAC. For further discussion,
see "Service Fees" below.
SERVICE FEES
On April 30, 1999, the Company entered into a service agreement with UFAC
whereby the Company pays a $25,000 monthly fee for certain services provided by
UFAC. Services included under this agreement are management, marketing
9
<PAGE>
technology, human resource support, and accounting and reporting. For the nine
months ended March 31, 2000, the Company incurred $225,000 in service fees under
this agreement. The Company did not incur any service fees related to this
agreement in the same period of the prior fiscal year.
The Company also pays UFAC for services performed beyond the scope of the
service agreement. For the nine months ended March 31, 2000, the Company
incurred $45,000 in computer consulting fees provided by UFAC that were not
within the scope of the service agreement.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND UFAC SERVICE FEES
The Company's expenses other than compensation and fringe benefits and UFAC
service fees decreased $190,000 during the nine months ended March 31, 2000 as
compared to the same period of the prior fiscal year. The principal items
affecting these expenses are decreases of $106,000 in legal fees, $90,000 in
advertising and promotion, $32,000 depreciation and amortization, and an
increase of $75,000 in bad debt.
Legal fees decreased significantly due to the increased need for legal services
during the first nine months of fiscal 1999 in preparation of the UFAC
transaction that was later consummated in April of 1999. As a portion of the
monthly service fee paid to UFAC includes marketing resources, the Company has
decreased similar services previously paid to external sources. Accordingly,
advertising and promotional expenses have decreased this fiscal year as these
services were provided by UFAC and recorded under service fees for the current
period. Furthermore, a portion of this reduction is due to the non-renewal of
the Company's share of a luxury suite at a sporting facility. Provision for
doubtful accounts increased primarily due to the aging of larger balance loans
to franchisees or licensees as compared to the same period of the prior fiscal
year.
INCOME TAXES
The Company's income taxes for the nine months ended March 31, 2000 were 39.5%
of its income before taxes, or approximately the same as they were in the prior
fiscal year. Changes made in the tax laws by various states and by the federal
government have not had a material effect on the Company's current overall tax
rates; however, there is no assurance that such changes will not occur in the
future.
OTHER INCOME
The Company's other income increased $29,000 or 29% from $99,000 in the nine
months ended March 31, 1999, to $128,000 in the current period. The most
significant items affecting other income are increases in the gain on sale of
investments and miscellaneous income of $13,000 and $14,000, respectively.
NET INCOME
The Company's net income for the nine months ended March 31, 2000 increased
$227,000 or 35.2% from $644,000 in the nine months ended March 31, 1999 to
$871,000 in the current period. The most significant items affecting net income
were a $427,000 decrease in compensation and fringe benefits, a $270,000
increase in fees for services provided by UFAC, and a $190,000 decrease in
expenses other than compensation and fringe benefits and UFAC service fees.
10
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1999
REVENUE
The Company's revenue decreased 5.7% or $90,000 to $1,482,000 during the three
months ended March 31, 2000 from $1,572,000 in the same period of the prior
fiscal year. This represents a $134,000 decrease in adjusting and risk
management fees and a $44,000 increase in continuing licensee and franchisee
fees.
The decrease of $134,000 in adjusting and risk management fees from $360,000 in
the three months ended March 31, 1999 to $226,000 in the three months ended
March 31, 2000 represents a 37.2% decrease. The Company experienced decreases in
adjusting fees of $72,000 in its Phoenix office, $47,000 in its Tucson office,
and $12,000 in its Las Vegas/Henderson office. The remainder of the decrease,
$3,000, is due to a decrease in risk management fees.
The decrease in the Phoenix office mainly relates to the loss of a client. The
decrease in the Tucson office is the result of the Company's sale of the Tucson
office to a new franchisee on January 1, 2000. Risk management fees have
decreased as the Company has ceased providing these services this fiscal year.
The Company's revenue from continuing licensee and franchisee fees increased
3.6% or $44,000 from $1,212,000 in the three months ended March 31, 1999 to
$1,256,000 in the three months ended March 31, 2000. This increase reflects the
benefit to the Company's licensees and franchisees from an increase in claims
assignments from insurance companies and self-insureds.
The Company's revenue is affected by numerous matters including the work loads
of other companies and claims presented by their clients. Therefore, the Company
is unable to project its future revenue. The Company has historically seen
growth in the licensee and franchisee fees paid. However, during fiscal 1998,
the Company experienced a decrease in revenue due primarily to the phase out of
a business relationship with its then major client. The Company has responded to
the loss of revenue by continuing to develop and implement sales marketing
efforts to take advantage of its geographic diversity as well as the unique
strengths of its individual licensees and franchisees. The Company's revenue did
recover in fiscal 1999, to an amount comparable to that of fiscal 1997, which
was prior to the loss of the client, and the Company hopes to see continued
growth in licensee and franchisee fees paid from other sources.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 39.1% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses decreased 42.7% or $295,000 from $691,000 in the three months ended
March 31, 1999 to $396,000 in the current three month period. A significant
portion of this decrease is the result of the retirements of William J. Rocke,
former CEO and former Chairman of the Board, and Jean E. Ryberg, former
President, on June 30, 1999, and the resignation of Francis J. LaPallo, a former
Executive Vice President, on January 31, 2000.
Certain of the services provided by Mr. Rocke, Mrs. Ryberg, and Mr. LaPallo are
now provided by UFAC pursuant to a service agreement between the Company and
UFAC. Charges for these services are reflected in a monthly fee paid to UFAC.
For further discussion, see "Service Fees" below.
SERVICE FEES
On April 30, 1999, the Company entered into a service agreement with UFAC
whereby the Company pays a $25,000 monthly fee for certain services provided by
UFAC. Services included under this agreement are management, marketing,
technology, human resource support, and accounting and reporting. For the three
11
<PAGE>
months ended March 31, 2000, the Company incurred $75,000 in service fees. The
Company did not incur any service fees related to this agreement in the same
quarter of the prior fiscal year.
The Company also pays UFAC for services performed beyond the scope of the
service agreement. For the three months ended March 31, 2000, the Company
incurred $45,000 in computer consulting fees provided by UFAC that were not
within the scope of the service agreement.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND UFAC SERVICE FEES
The Company's expenses other than compensation and fringe benefits and UFAC
service fees decreased $71,000 during the three months ended March 31, 2000 as
compared to the same quarter of the prior fiscal year. The principal items
affecting these expenses are decreases of $47,000 in advertising and promotion,
$31,000 in office expenses, and $20,000 in depreciation and amortization, and an
increase of $34,000 in the provision for doubtful accounts.
Advertising and promotional expenses decreased $47,000 this quarter as a portion
of the monthly service fee paid to UFAC includes marketing resources.
Accordingly, advertising and promotional expenses have decreased this fiscal
year as these services were provided by UFAC and recorded under service fees for
the current period. Furthermore, a portion of this reduction is due to the
non-renewal of the Company's share of a luxury suite at a sporting facility.
Office expenses decreased $31,000 primarily as a result of the sale of the
Tucson office on January 1, 2000. Accordingly, the office expenses associated
with that location have been either eliminated or have decreased substantially.
Provision for doubtful accounts increased primarily due to the aging of larger
balance loans to franchisees or licensees as compared to the same period fo the
prior fiscal year.
INCOME TAXES
The Company's income taxes for the three months ended March 31, 2000 were 40.2%
of its income before taxes, or approximately the same as they were in the same
period of the prior fiscal year. Changes made in the tax laws by various states
and by the federal government have not had a material effect on the Company's
current overall tax rates; however, there is no assurance that such changes will
not occur in the future.
OTHER INCOME
The Company's other income increased $7,000 or 20.0% from $35,000 in the three
months ended March 31, 1999 to $42,000 in the current three month period. The
most significant items affecting other income include increases of $8,000 in
interest income, $3,000 in miscellaneous income, and $5,000 in the loss on sale
of fixed assets, and a decrease of $2,000 in dividend income.
NET INCOME
The Company's net income for the three months ended March 31, 2000 increased
$96,000 or 46.2% from $208,000 in the three months ended March 31, 1999 to
$304,000 in the current quarter. The most significant items affecting net income
were a $90,000 decrease in revenue, a $295,000 decrease in compensation and
fringe benefits, a $120,000 increase in fees for services provided by UFAC, and
a $71,000 decrease in expenses other than compensation and fringe benefits and
UFAC service fees.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, fair values, or future cash
flows due to potential changes in the price of a financial instrument. A
financial instrument's value may change as a result of changes in interest
rates, exchange rates, commodity prices, equity prices, and other market
changes. Market risk is inherent in all market risk sensitive financial
instruments.
12
<PAGE>
During the first nine months of fiscal 2000, the Company did own an immaterial
number of common stock shares that it sold in October 1999. Therefore, the
Company is no longer exposed to any market risk associated with this investment.
The Company has a book value of $619,000 invested in municipal bonds that it
carries as long term held to maturity investments. An increase in interest rates
would result in a decline in the market value of the bonds. These bonds mature
between 2005 and 2031. As the Company has the intent and ability to hold these
bonds to maturity, the market risk associated with these bonds is insignificant
and does not have a material effect on the financial statements.
Although the Company wholly owns a Canadian subsidiary, the cash held by the
Canadian subsidiary is not material to the Company's operations. Therefore, any
foreign currency fluctuations would not have a material effect on the Company's
financial statements.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Safeway Inc. filed a complaint against multiple defendants
including the Company in the United States District Court in Nebraska. The
complaint arises from the alleged embezzlement of over $1,800,000 by a former
franchisee of the Company. The complaint alleges claims against the Company in
connection with claims services provided for the benefit of Safeway, Inc.,
including breach of fiduciary duty, negligent failure to monitor or supervise,
vicarious liability, and breach of contract. The complaint seeks an accounting
and a recovery of compensatory damages of at least $1,800,000. The Company has
denied the allegations of liability contained in the complaint. As the lawsuit
is still in its earliest phase, the Company cannot yet assess the merits of the
complaint or whether this suit will have a material adverse effect on the
Company. The Company has sought coverage under various insurance policies it
holds and has received denials of coverage from the carriers. As of March 31,
2000, the Company has not accrued any liability with respect to this lawsuit.
From time to time in the normal course of its business, the Company is named as
a defendant in lawsuits. With exception of the complaint described above, the
Company does not believe that it is subject to any such lawsuits or litigation
or threatened lawsuits or litigation that will have a material adverse effect on
the Company or its business.
ITEM 2. Not Applicable
ITEM 3. Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On January 26, 2000, the Company held its 1999 Annual Shareholders' Meeting.
The Company's Board of Directors were reelected with 8,473,719 shares being cast
and 18,144 shares withholding authority. The Directors elected and the numbers
of votes each received are as follows:
John M. Davies 8,434,998
Jeffrey R. Harcourt 8,434,998
Troy M. Huth 8,434,998
Jeffrey C. Jordan 8,434,998
Francis J. LaPallo 8,454,626
Louis T. Mastos 8,449,826
William J. Rocke 8,392,326
Jean E. Ryberg 8,393,826
William A. White 8,455,276
13
<PAGE>
The Company's shareholders ratified the appointment of McGladrey & Pullen, LLP,
Certified Public Accountants, as the auditors of the Company for the Company's
fiscal year ending June 30, 2000 with 8,419,419 affirmative votes, 24,278
against, and 30,022 abstaining.
Subsequent to the Company's Annual Shareholders' Meeting, Mr. LaPallo resigned
from the Board and from employment with the Company and Kenneth A. Sexton was
appointed to the Board to fill the vacancy.
ITEM 5. Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on December 2, 1999, to report a change
in ownership of the Company's majority shareholder, UFAC.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: 5/10/00 /s/ Troy M. Huth
----------------------------------------
Troy M. Huth, President, Chief Executive
Officer and Director
Date: 5/10/00 /s/ Jeffrey R. Harcourt
----------------------------------------
Jeffrey R. Harcourt, Chief Financial
Officer and Director
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 (UNAUDITED) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,159,691
<SECURITIES> 0
<RECEIVABLES> 1,586,463
<ALLOWANCES> 524,495
<INVENTORY> 0
<CURRENT-ASSETS> 3,671,588
<PP&E> 2,636,609
<DEPRECIATION> 1,003,541
<TOTAL-ASSETS> 6,525,859
<CURRENT-LIABILITIES> 596,919
<BONDS> 0
90,191
0
<COMMON> 0
<OTHER-SE> 5,838,749
<TOTAL-LIABILITY-AND-EQUITY> 6,525,859
<SALES> 0
<TOTAL-REVENUES> 4,725,154
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,414,618
<LOSS-PROVISION> 227,203
<INTEREST-EXPENSE> 1,127
<INCOME-PRETAX> 1,438,609
<INCOME-TAX> 567,712
<INCOME-CONTINUING> 870,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 870,897
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
